By Ernest Dumas
Brookings Institution economists have taken a fresh look at the effect that tax cuts for high earners have on economic growth and jobs, 35 years after Jude Wanniski and Arthur Laffer persuaded Ronald Reagan and Jack Kemp that it would be nothing short of spectacular.
Here’s a shocker: It turns out that the effect is the same as it was then, none. That has been true when the federal government tested it and the results have been the same when state governments tried it.
But faith in such a simple and rosy theory doesn’t die easily. Republican candidates for president promise that they will make it work and a sizable element of the congressional party, not merely the “freedom caucus,” say they will get it done if they get control of the executive branch.
Despite the cataclysmic results of drastic tax-cutting experiments in the nearby and economically similar states of Kansas and Louisiana, the Arkansas legislature set out on the same course when the GOP took control of the legislature in 2013 and again this year. Legislators were respectful enough of their new governor, who was wary of plunging the state into a fiscal crisis in his first two years, that it did not get too far out of hand.
But Hutchinson joined the euphoria about the impact that income-tax rate cuts would have. People are going to pick up stakes and leave California, Massachusetts and Connecticut to enjoy Arkansas’s lower taxes, they said.
It was an absurd notion. When you factor the loss of federal deductions from the old, higher tax rates, the tax savings from the rate cuts will be hardly noticeable for an Arkansas taxpayer, and for a transient Californian the greater tax transfer to the IRS by moving to Arkansas would eliminate the incentive to move simply for tax purposes.
Even a casual review of tax history, both nationally and in Arkansas, ought to explode the myth that tax cuts for high incomes produce big growth and a flood of jobs, but the siren song never loses its allure. I’ve written that before, and there always is a chorus, “What about the big Reagan tax cuts of 1981?” The revisionist history is that Reagan inherited a jobless rate of 10.8 percent from Jimmy Carter, slashed taxes and spending and sent the economy on a stratospheric binge of growth.
Here’s the real history. A mild recession in Carter’s last year raised unemployment well above 7 percent and it had declined to 7.4 percent when Reagan took office. Congress quickly cut spending as Reagan asked and passed the giant Kemp-Roth tax bill. The economy fell into recession and the jobless rate was above 10 percent from September 1982 through July 1983, still the longest and steepest recession since World War II.
Revisionists might take the word of Martin Feldstein, Reagan’s chief economist, and Doug Elmendorf, former director of the Congressional Budget Office, whose study found that the 1981 tax cuts had virtually no net impact on growth and jobs.
Who knows whether the results would have been different had Reagan not gotten Congress to raise taxes five times over the next seven years to try to stanch the flow of red ink? Champions of the old supply-side nostrum are free to claim that they would have.
Then you had George W. Bush’s three rounds of tax cuts, 2001-03. No one now will claim that Bush was right when he proclaimed that he was “unleashing” the American economy. Tax rates on capital gains, ordinary income, dividends and estates were all slashed and they produced the most sluggish period in 70 years.
Stretch it over a longer history and compare us with the European democracies. Between 1960 and 2012 the top income tax rate in the United States fell by more than 40 percentage points and the country grew by 2 percent per capita, the same rate as Germany and Denmark, which kept their high marginal rates.
Regardless of the history, “lower tax burdens for high incomes equals higher growth”remained a maxim for Republicans and the 2007-09 recession gave it a fresh lease. Everything was about jobs. If one party or the other favored anything it was said to create or protect jobs; if the party opposed something it was to be a huge job killer. Health insurance reform terrified the country because Republicans, the Chamber of Commerce and other groups advertised that it would lay off a large part of the work force. In practice, it was a major job creator. (Track the job figures in Arkansas starting with the Medicaid expansion and subsidized private insurance in 2013.)
Some dozen states have cut personal or corporate income taxes significantly since 1992 but only those favored in the financial boom or the oil and gas production boom (New Mexico and Oklahoma) experienced a net gain in their employment share over the period.
Kansas and Louisiana are our role models. Governors Sam Brownback and Bobby Jindal came into office promising to take axes to the states’s tax systems. Brownback said his tax cuts,which heavily slashed rates on high incomes, would be “like a shot of adrenaline into the heart of the Kansas economy.” Kansas would point the way for the whole country. Jindal also planned to mount a campaign for the presidency on his incredible growth record in Louisiana.
You know what happened—plummeting tax receipts, sharp cuts in public services to avert illegal deficits and finally, this year, major tax increases begged by both flailing and intensely unpopular governors.
The most familiar scenario is that when states pull themselves out of the fiscal holes created by big tax cuts the new taxes fall heavily on low- and middle-income wage earners and not the well-to-do who were favored with the tax cuts. That’s what happened in Kansas and Louisiana. Jindal also won the wrath of Louisianans, including Republican lawmakers, by insisting that no one call them tax increases.
Arkansas, as yet, has not been as rash as Brownback or Jindal, but if the worst still happens in 2017 the Republican authors already have an explanation. Obamacare did it.